But I do strongly disagree with what seems to be your central argument:

After all, in a traditional game of DnD combat, the GM has complete authorial control, above and beyond the dice.

I do not believe this is true. There are two other sources that have "authorial control" equal to or great than that of the DM.

1) The players.2) The rules.

The players do (or should, in my opinion) have equal authorial power over the game. They decide what the characters do, and in many cases they can decide what situations they get into. In a good story, any situations should be a direct result of the character's actions. And so in my D&D games (which I consider to be good stories), they are. As a DM I can create broad, external, environmental circumstances, but it is up to the players to define the specific, internal, and character-based circumstances.

And while Rule 0 does exist, I believe (again, my opinion here) that the DM should not be above the rules. There needs to be some basis for playing the game, some common ground upon which all the players can meet. Something that makes it so the DM's decisions about anything are not completely arbitrary. And that basis is what allows the group to play the game. And manipulating and exploring the D&D chassis is in itself a sub-game, one that I highly enjoy. So even though you can theoretically get rid of the rules, I personally would not want to play that way. I like playing D&D instead of free-form.

And even if you are doing free-form, if the players do not have equal say then it is no longer a cooperative venture at all--it's the DM telling a story and the players listening.

In short, it seems to be your opinion that the DM has total authorial control, and so is in total control of whatever happens in the game. It is my opinion that the DM does not have total authorial control, and so the game can quite possibly get beyond his control or go in directions he did not expect. And I am willing to just agree to disagree about that. Though I will end that I have heard much anecdotal evidence about how writers are often surprised by the actions their characters take, even though such writers should have total authorial control. So do they really?

The party is a group of pirates who are currently working under a big head pirate NPC. This pirate has plans to take over a small kingdom, which involved the PCs breaking into the castle and taking out its defenses.

The PCs managed to sneak in, but in the process the Barbarian made the PC decision to leave her weapon behind (figuring she could kill a guard and get another one). The party also split up to enter the castle, and did not rejoin for a significant period of time. Two of the characters spent an almost exorbatent amount of time engaged in a scuffle with a group of guards, and because of poor die rolling, wasted a ton of resources (HP, and spells) with almost no effect, not to mention sounding the general alarm. The other pair of PCs also used most their spells taking out a single solitary guard. So when the PCs finally regrouped, they had almost the entire castle garrison coming down on them and few spells or hit points left. And in this battle, a nasty critical took down the Binder. The Wizards split up and ran away, and the Barbarian surrendered.

Next session, the Binder and the Barbarian had been captured and were questioned. One of the Wizards escaped the castle (and wasn't at the session), and the other walked out into the middle of the guards and got himself captured as well. While being escorted by two guards to the local jail, the PCs tried to escape. The Barbarian had wiggled free of her ropes and pulled her hidden dagger, and the Wizard used a spell to take out his ropes. But as they had been captured, none of the characters were wearing any armor. So the Barbarian was not able to stand up to the guards in a 1-1 fight (being almost out of HP anyway), the Binder still had his hands bound (and was standing only because a temporary Diehard Feat effect) and so was unable to do much of anything. So the Barbarian fled (easily outrunning her guard) in one direction, the Binder in another, while the Wizard went in a third direction to try and use his remain spells to take out some of the castle defenses (so that they could complete their mission).

So finally the PCs found themselves facing a single guard beneath the palace walls. The Barbarian couldn't take more than a single hit (and was exhausted from having her Rage end anyway), the Binder was at -10 and couldn't take any actions more significant than a standard move, and the Wizard was totally out of spells. So when the guard finally called for help, the PCs were shot down by the rest of the guard.

But here's the deal: the Barbarian and the Binder are both at negatives, the Wizard is running away. So the party isn't technically dead, but they did fail in their mission. So the guy they're working for will fail, and since that quest was driving the campaign, the campaign is over. So even if I have the characters survive and continue playing, the story is still finished. It doesn't make any sense for it to continue (and I'm sure you'll agree there should be some consequence for failure--otherwise the PCs haven't had any impact on the story and so why are they even playing?). And because the group is going to split in a month or two, it seemed a better idea all around to have the campaign end.

The pirate will be at the castle in half an hour (game time). The pirate will attack. The defenses will still be up, so he will lose.

And yes, I am considering doing a reboot type thing for the game. The PCs are tried and imprisioned. Cut to 10 years later, when something happens (what I'm not quite sure yet). Make it a total reboot, change some of the setting/house rules I've been using, allow characters to be rebuilt, maybe allow a switch...

But either way the campaign I was running is over. The characters may continue, but it would be a different campaign. Does that distinction make sense?

They were (understandably) disappointed, but they felt I had given them an even chance (I gave them all kinds of rerolls and stuff towards the end). They seemed understanding, and didn't feel like I deliberately killed them or anything. And since one of the other guys has run a couple sessions of a game, we decided we'd play that one for now. And he seemed pretty excited about being able to continue that game.

I haven't told the player who wasn't at the session yet. I have a feeling she's going to be pissed, but then she gets upset pretty easily (but that's another issue entirely).

I'm going to run the idea of maybe rebooting the characters in a different campaign in the future by the players individually during the week, and then at our next meeting I'll give them a closing narrative (which they wanted anyway just for closure) which may or may not put their characters in a position to maybe do something in the future (ie, alive).